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Question 1
Bilt-Better Battery Company manufactures and sells automobile batteries. Financial data concerning the company are as follows:
Selling Price: $65 per unit
Costs:
Variable manufacturing $24 per unit
Fixed manufacturing $225,000 per year
Variable selling and administrative $16 per unit
Fixed selling and administrative $125,000 per year
Sales for last year were 20,000 units.
Required:
How many batteries must be sold each year for the firm to earn a net income of $200,000 before tax?
The company plans to improve the quality of the battery next year, but this improvement will increase variable cost by $5 per unit. Management believes that the improvement to the battery, along with increased advertising costing $100,000, will boost sales to 25,000 units. What selling price is needed for the firm to earn a net income of $200,000?
Do you think the company should take the steps in part B? Why or why not?
The company has received an offer from a customer to purchase 2,000 batteries at $58 per unit. There would be no variable selling and administrative costs, but since the company is at capacity, they would have to reduce sales to other customers by 2,000 units. Should they accept this special order?
Question 2
The Cosgrove Company manufactures two products, Product K-7 and Product L-15. Product L-15 is the more complex of the two products, requiring two hours of direct labour time per unit to manufacture compared to one hour of direct labour time for product K-7.
Overheard currently is assigned to the products on the basis of direct labour hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product L-15 and 40,000 units of Product K-7 during the current year. Unit costs for materials and labour are:
|
|
Product K-7 |
Product L-15 |
|
Direct material |
$11 |
$24 |
|
Direct labour ($6 per hour) |
6 |
12 |
Required:
Compute the predetermined overhead rate under the current method of allocation, and determine the cost to manufacture one unit of each product for the current year.
Assume that the company’s overhead costs can be traced to four major activities. Therese are given below:
|
Activity |
Total Activities |
Product K-7 |
Product L-15 |
|
Machine setups required |
2,400 |
800 |
1,600 |
|
Purchase orders Issued |
600 |
100 |
500 |
|
Machine hours required |
17,500 |
3,000 |
14,500 |
|
Maintenance requests issued |
1,590 |
270 |
1,320 |
What would you expect to happen to cost of K-7 and L-15 if activity-based costing were applied? Note that you cannot do cost calculations based on the data given: provide a commentary only.
Question 3
Kariba manufactures batteries for several markets. The firm is organized is organized into two independent operating divisions: consumer electronics and industrial products. Recent operating results for each division (000’s omitted) were as follows.
|
|
Consumer |
|
Industrial |
|
Total |
|
Sales |
$23,600 |
|
$43,900 |
|
$67,500 |
|
Variable costs |
8,100 |
|
20,900 |
|
29,000 |
|
Fixed |
9,800 |
|
17,300 |
|
27,100 |
|
|
|
|
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